Question: Two car companies are planning to launch, at the same time, a car to the market. Each of them is considering whether it should

Two car companies are planning to launch, at the same time, a

Two car companies are planning to launch, at the same time, a car to the market. Each of them is considering whether it should offer credit to the buyers to reach a larger share of customers. Offering credit would imply incurring a cost of 200 million euros for the company. Both companies prefer not to offer credit, but they are afraid that the other one will do offer and will therefore attract more clients. Suppose that the gross profit for each company is 600 million, independently whether they offer credit or not. If one firm offers credit and the other does not, the first will earn 1000 million gross profits while the other will obtain 300 million profits. (i) What are the strategies of each car company? Represent the game in a matrix form. (Mark: 0.5) (ii) How do you classify this type of game? What is the proper equilibrium concept to solve this game? What is the equilibrium of this game? (Mark: 0.5) (iii) Find the Nash equilibrium of the game and discuss why this equilibrium coincides with the equilibrium obtained in (ii). (Mark: 0.5) (iv) Discuss whether the equilibrium outcome will change if one car company decides first its strategy and then the other company follows. Explain in detail your answer. (Mark: 0.5)

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answer i The strategies of each car company can be represented in the following game matrix Car Company 1Car Company 2 Credit 1000 300200 600 No Credit 600 600600 600 ii This type of game is a noncoop... View full answer

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